Should You Surrender Life Insurance Policy?

zerodha zerodha zerodha

Life insurance policy surrender could be a difficult puzzle to solve for a layman. While pondering over such questions, one side of your brain says that it not worth paying anymore and at the same time other yells at you that we already have paid for this policy now there is no way back. What exactly you should do? Are you seeking honest answer of this question? Then here I will, as an insurance agent, try to help you decide whether you should think of life insurance policy surrender or not.

Insurance plays an important role in a person's life. It helps a person achieve his future financial goals. And at the same time, it enables him save his loved ones from financial hardships that might arise upon his sudden death.

After the death of mere breadwinner, family faces many unforeseen circumstances and goes through immense emotional pain. It's obvious that emotional pain of losing a family member cannot be compensated by anything but a life insurance policy can certainly help family survive and maintain a healthy lifestyle.

Should I surrender my life insurance policy

Therefore, it is not a wise decision to surrender life insurance policy before maturity. Although sometimes reluctantly, we are required to take such steps under certain circumstances.

If you are going to surrender your policy then in this post we have listed pros and cons of surrendering a life insurance policy. This post will help you decide, 'Should you surrender life insurance policy?'

You're reading policy surrender guide:

What happens when I surrender a life insurance policy?

First you will not be covered anymore by your insurer which means if anything happens to you, your family will not get any compensation.

Therefore, if you ask, 'Should I surrender my life insurance policy?' then answer is, "No, it is not advised; especially if you're yet to achieve financial freedom."

If you have paid your insurance premiums for a certain period then in return you will only get a pinch of your investment.

Nevertheless there are certain situations in which policy surrender can be justified. Below are some advantages and disadvantages of cancelling a life insurance policy before maturity.

Advantages of surrendering a life insurance policy

It is not right to surrender a policy before maturity because you bear immense loss by doing so. Insurers invest a portion of premiums paid in savings components such as equity, bonds, mutual fund and the like. And accumulated cash in your insurance folio is called cash value.

Basically, insurance companies divide your premium into two components 1) the security component and 2) the cash value component.

Insurance company tailors your insurance folio in such a manner that at the time maturity you get assured benefits.

But when you terminate your insurance contract before maturity, it is a violation of contract's terms and conditions. And you already know violations are subject to penalties.

When you take this decision, insurance company is forced to terminate your insurance contract and close your savings portfolio to pay you the cash accrued. Since you're cancelling your policy, benefits you will get will be uncertain and insurer will also implement surrender charges.

Let discuss pros of policy surrender in brief.


Having excessive insurance cover is not considered good. Generally, we should have cover 10 to 20 times of our annual income. If you have insurance cover beyond this threshold, then all you are doing is putting unnecessary burden on your pocket.

Therefore, if you have more than one insurance policies and you feel that you do not need all of them then you can discontinue the policies that you do not need.

And invest saved premium in other investment options such as mutual fund, systematic investment plan and the like. Believe me returns that you will get will be astonishingly high.


Like being over-insured, having inadequate insurance cover is also not a wise decision.

If your existing insurance policy does not fulfill your insurance needs or you feel that you have insufficient insurance cover then you can surrender your policy; If this (existing policy) does not allow you to increase your insurance cover.

But remember, premium for new insurance policy will be higher than the existing one because of age factor. Therefore, instead of surrendering your policy, you should increase your insurance cover or convert your policy or even think of portability.

To meet insurance needs

If your policy is not meeting your insurance needs then you can consider policy surrender. But be aware of the disadvantages associated with it such as surrender charges. Also, you have policy surrender alternatives such as convertible policy, portability, insurance assignment and the like. Therefore, must consider other options before you make final decision.

To arrange immediate fund

One can discontinue his policy to arrange funds in emergency. After surrendering the policy, insured gets some cash in the form of surrender value.

But one should know that life insurance policies that come with investment components have liquidity option. This thing can help a policyholder arrange emergency funds in needy situations without cancelling his policy.

Disadvantages of surrendering life insurance policy

Premature closure of policy is subject to penalties such as surrender charges. As mentioned earlier, you only get the cash value accumulated in your insurance saving portfolio. Here are some disadvantages of terminating an insurance contract:

  • After canceling it, you will be deprived from the benefits you will actually get at the time of maturity. In simple words, you will no longer be covered by your insurance company and decided benefits will also not be paid. For example, suppose someone cancels his policy today and dies the next day in an accident, then in that case the family would not be compensated by the insurance company because he had cancelled the contract.
  • The biggest thing is you will become uninsured and if unfortunately your death occurs, your family or nominee will not get any compensation from your insurance company.
  • In future, if you buy a new insurance policy again then you will have to pay a higher premium for the same benefits you would be getting from your previous policy because of your age factor. Your premiums will be higher and benefits you will get may be limited.
  • Remember that only the savings portion of your policy will be given to you as surrender value.
  • After some deductions you get the surrender value. Insurer will deduct surrender charges and first year premium before he will pay you surrender value.
  • If you terminate your contract before the policy term, you will not be entitled to receive special bonuses.
  • If you surrender your policy before the specified time or lock-in period (3 years or 5 years) then you will not be entitled to receive cash value.
  • Remember that not all policies provide surrender value. Insurance policies that come with investment options have surrender value and cash value.

At pen off

It's quite obvious that you are already aware of how important insurance is in our life; that's why you have one. Perhaps, you're really going through hard times that is why you're taking this crucial decision. What I personally suggest you is explore other options before you actually surrender your policy like lowering your premiums or porting your policy.